- Capital and goods flow from the peripheral countries of Europe to the core. This huge trade imbalance has no way to resolve itself. The peripheral countries were able to borrow money at German rates for many years, while the politicians in those countries exhibited no discipline in their budgeting process and ran up huge debts and deficits. Then the bill came due.
- Many Eurozone countries have run up unsustainable debts relative to their potential growth. Unsustainable, that is, under a normal interest-rate regime. After the collapse of Greece, the European Central Bank, worried about contagion effects, lowered interest rates dramatically; and countries like Italy took on large amounts of additional debt. What is now nearly a 140% debt-to-GDP ratio in Italy is manageable when interest rates are only a few points. That ratio would be a disaster at 6 to 8%, and Italy would soon be Greece. It should be noted that, even with the low rates, the Italian debt-to-GDP ratio increases each year.
- As bad as the entitlement situation is in the US, it is worse in most of Europe, especially in the problem countries (including France!). Given the demographics involved, these countries simply cannot sustain their governments’ promises. They have no room to increase taxes without severely damaging their economies even further.
- Protests again erupted in Greece over EU-imposed austerity measures.
- A left-wing coalition brought down a euro-friendly Portuguese government just two weeks after it took power.
- Spain’s Catalan region moved forward with its secession effort.
- “Brexit” sentiment grew in the UK.